Chapter 7 - 15 Gittell Et Al

The Journal of Applied Behavioral Science
http://jab.sagepub.com Relationships, Layoffs, and Organizational Resilience: Airline Industry Responses to September 11
Jody Hoffer Gittell, Kim Cameron, Sandy Lim and Victor Rivas Journal of Applied Behavioral Science 2006; 42; 300 DOI: 10.1177/0021886306286466 The online version of this article can be found at: http://jab.sagepub.com/cgi/content/abstract/42/3/300
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Relationships, Layoffs, and Organizational Resilience

Airline Industry Responses to September 11
Jody Hoffer Gittell

Brandeis University
Kim Cameron
University of Michigan
Sandy Lim
Singapore Management University
Victor Rivas
Massachusetts Bay Transportation Authority
The terrorist attacks of September 11, 2001, affected the U.S. airline industry more than almost any other industry. Certain airlines emerged successful and demonstrated remarkable resilience while others languished. This investigation identifies reasons why some airline companies recovered successfully after the attacks while others struggled. Evidence is provided that layoffs after the crisis, although intended to foster recovery, instead inhibited recovery throughout the 4 years after the crisis. But, layoffs after the crisis were strongly correlated with lack of financial reserves and lack of a viable business model prior to the crisis. Digging deeper, the authors find that having a viable business model itself depended on the development and preservation of relational reserves over time. Our model shows that the maintenance of adequate financial reserves enables the preservation of relational reserves and vice versa, contributing to organizational resilience in times of crisis. Keywords: resilience; layoffs; relational reserves; financial reserves; crisis
THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE, Vol. 42 No. 3, September 2006 300-329 DOI: 10.1177/0021886306286466 2006 NTL Institute
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Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11
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The U.S. airline industry faced devastating losses in the wake of the September 11,
2001, terrorist attacks. According to Kevin Murphy (2001), airline industry analyst for Morgan Stanley, If there was ever a stress test for a good business, this is it. The day after the attacks, the major airlines appeared in front of Congress seeking relief in the form of federal assistance. As a result, $15 billion was allocated to the industry, some in the form of outright grants to cover the loss of operating revenue in the days after the attacks when the industry was shut down by federal order. The rest of the $15 billion allocation was made available in the form of loan guarantees to be allocated according to rules established by the Air Transport Stabilization Board. Even with this federal assistance, however, the industry continued to lose millions of dollars on a daily basis due to the slow rate of passenger return. In response to these losses, the major airlines cut their flights by an average of 20% and laid off an average of 16% of their workforces in the weeks following the attacks. Even though all of the major airlines were devastated about equally in terms of the initial decline in passenger traffic, they did not respond in the same way. Some airlines emerged from this crisis resilient and strong, whereas others languished and even confronted bankruptcy. This is a story of organizational resilience. It is an investigation of the factors explaining the success of some airline companies after the 9/11 attacks and the struggles of others. It focuses on the roles played by relational reserves, financial reserves, and the viability of the underlying business models in 10 major airline companies. Specifically, the study explains why managers must maintain and enhance strong employee relationships (relational reserves) during crisis to ensure commitment and productivity. But it also highlights the crucial role played by financial reserves (cash flow and low debt levels) and an organizations business model in the ability to respond effectively to crisis. Organizations are better able to cope with a crisis when they maintain strong relational and financial reserves and when they have business models that fit the needs of the existing competitive environment. Drawing on 15 years of data from the airline industry prior to the crisis, we see that achieving a viable business model is itself a function of positive employee relationships. Although layoffs
We thank participants in the 2001 Positive Organizational Scholarship Conference at the University of Michigan and participants in the 2002 Academy of Management symposium on organizational resilience for their insights regarding relationships and resilience. We thank our colleagues in the Massachusetts Institute of Technologys Global Airline Industry Program, particularly Peter Belobaba, John Hansman, Thomas A. Kochan, Robert McKersie, and Andrew von Nordenflycht for their insights regarding the airline industrys response to September 11. Jody Hoffer Gittell is an associate professor of management in the Heller School for Social Policy and Management at Brandeis University. Kim Cameron is a professor of management and organization in the Ross School of Business and professor of higher education in the School of Education at the University of Michigan. Sandy Lim is assistant professor in the School of Economics and Social Sciences at Singapore Management University. Victor Rivas is in the Budget Department in the Massachusetts Bay Transportation Authority, Boston.
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enable organizations to respond to crisis in the short term, they also risk damaging the relationships that are needed for long-term recovery.
THE ROLE OF POSITIVE RELATIONSHIPS FOR INDIVIDUALS, COMMUNITIES, AND ORGANIZATIONS Abundant research has shown that positive human relationships improve outcomes for individuals, communities, and organizations (Cameron, Dutton, & Quinn, 2003; Dutton & Ragins, 2006). For individuals, positive social relationships are associated with higher levels of physical and psychological well-being (Ryff & Singer, 2001) and lower risk of death (Seeman, 1996), at least partly due to the revitalizing, stressreducing effects of positive relationships. Positive relationships affect the hormonal, cardiovascular, and immune systems of the body, thus enhancing health and well-being and enhancing the relationships themselves (Heaphy & Dutton, in press). In communities, the density and patterns of social connections are predictors of economic vitality (R. J. Gittell & Vidal, 1999; Putnam, 2001). Social capital and the existence of positive social networks account for community-level outcomes such as educational attainment, financial well-being, and the reduction of crime (Baker, 2000). In organizations, social capital facilitates the transfer of knowledge (Levin & Cross, 2004; Nahapiet & Ghoshal, 1998) and the achievement of coordinated action (Crowston & Cammerer, 1998; Faraj & Sproull, 2000; Leana & Van Buren, 1999) among organizational members. For example, relationships of shared goals, shared knowledge, and mutual respect support high levels of coordination among frontline employees, with positive effects on both quality and efficiency performance (J. H. Gittell, 2001, 2002, 2003; J. H. Gittell et al., 2000). Moreover, friendships among coworkers and the presence of caring and compassionate relationships are significant predictors of performance outcomes (Cameron & Caza, 2004; Dutton, 2003). A review by Heaphy and Dutton (in press) of the linkage between relational reserves at work and physiological outcomeswhich in turn facilitate higher levels of worker engagement and productivitymakes a strong case that positive connections at work have an important impact on performance. Dutton and Raginss (2006) edited volume provided multiple chapters presenting evidence for the positive impact of positive social relationships on resilience and performance. Collectively, this research contributes to a relational theory of how people develop (Miller, 1976; Miller & Stiver, 1997) and how they work effectively together to improve organizational outcomes (Fletcher, 1999; Gersick, Bartunek, & Dutton, 2000).
RELATIONAL RESERVES AS A SOURCE OF RESILIENCE The role of relationships is especially important when considering how individuals and organizations respond to crises. Most organizational theory has focused on the negative consequences of crisis such as threat rigidity, downward spirals, vicious cycles, and tipping points (Gladwell, 2002; Sitkin, 1992; Staw, Sandelands, & Dutton, 1981;
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Weick, 2003), yet some organizations demonstrate a remarkable tendency to flourish and thrive in the midst of crisis. These organizations demonstrate resiliency. Resiliency in everyday parlance refers to the capability to recover from or adjust easily to misfortune or change (Websters Ninth New Collegiate Dictionary, 1987). In organizational science, it refers to (a) the maintenance of positive adjustment under challenging conditions (Weick, Sutcliffe, & Obstfeld, 1999; Worline et al, 2004), (b) the ability to bounce back from untoward events (Sutcliffe & Vogus, 2003), and (c) the capacity to maintain desirable functions and outcomes in the midst of strain (Bunderson & Sutcliffe, 2002; Edmondson, 1999). Resilience is a dynamic capacity of organizational adaptability that grows and develops over time (Wildavsky, 1988). It is not a static attribute that organizations do or do not possess. Rather, it results from processes that help organizations retain resources in a form sufficiently flexible, storable, convertible, and malleable to avert maladaptive tendencies and cope positively with the unexpected (Sutcliffe & Vogus, 2003; Worline et al., 2004). These processes enable the maintenance of positive social relationships at work, which have been linked to resilience and recovery in individuals (Ryff & Singer, 2001; Seligman, 2002) as well as in organizations (Cameron, Bright, & Caza, 2004; Luthans, 2002; Spreitzer, Sutcliffe, Dutton, Sonenshein, & Grant, 2005). That is, a growing body of empirical evidence supports the notion that positive relationships at workor relational reservesare a prerequisite to organizational resilience. These outcomes center on the nature of the relationships that develop among organization members. The levels of social, emotional, and moral support provided to one another, for example, are key components of organizational resilience (Carver, Scheier, & Weintraub, 1989). In a laboratory study where participants were exposed to equivalent levels of stressors, Aiello and Kolb (1995) found that members of cohesive groups reported the least stress. Similar evidence found that social support among employees reduced the negative effects of work stressors on work outcomes (Moyle & Parkes, 1999; Schaubroeck & Fink, 1998). Positive relationships served as the key coping resources that enabled individuals and organizations to develop resilience in the face of work stress. Individually, children who had close relationships with caregivers, other competent adults, or peers and those living in a closely knitted community were more likely to cope effectively during times of adversity (Masten & Reed, 2002).
FINANCIAL RESERVES AND VIABLE BUSINESS MODELS AS SOURCES OF RESILIENCE The predominant theme in the resilience literature is that resiliency results from the presence of both (a) positive relationships and (b) the access to adequate resources. Wildavsky (1988) argued that in addition to social support, retaining financial reserves in a form that is sufficiently flexible to cope with unanticipated events was a key mechanism for developing resiliency. Similarly, in a study of hospital responses to an unexpected doctors strike, A. D. Meyer (1982) found that slack resources worked as
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organizational shock absorbers that buffered the impact of environmental jolts. The accumulation of substantial financial reserves during tranquil periods enabled one of the most resilient hospitals in the study to adapt to the crisis without the need to lay off employees. In another hospital, a strong organizational ideology emphasizing employee well-being greatly affected the organizations ability to respond to environmental jolts. This hospital had to suffer a short-term decline in profits by not laying off employees, but the strategy allowed it to preserve its commitment to its employees and contributed to its ability to readjust quickly after the crisis. Building on the theme of adequate resources, we further hypothesize that having a business model that is viable in the existing competitive environment is another important source of resilience for surviving a crisis. Financial reserves help an organization to weather the storm by providing a buffer against losses, but a business model that meets the needs of the existing competitive environment is expected to enable an organization to minimize those losses and thus to recover more quickly. A viable business model in addition to financial reserves is expected to be particularly important in the face of a sustained crisis. Given the evidence cited earlier regarding the role of relationships in achieving productivity and quality outcomes, we hypothesize that relational reserves play another critical role in achieving resilience. Not only are relationships critical as a coping mechanism in the face of crisis according to this story, but they are also critical for creating viable business models that can survive a sustained crisis.
LAYOFFS AS A RESPONSE TO CRISIS Paradoxically, a common organizational response to crisisnamely, layoffstends to deplete the relational reserves that help organizations cope during periods of crisis. Many studies have reported the negative effects of downsizing on organizational relationships (Cameron, 1994, 1998; Cameron, Freeman, & Mishra, 1991), including (a) the destruction of interpersonal relationships, shared values, trust and loyalty, and commonality and strength of culture; (b) reduced information sharing and increased secrecy, deception, and duplicity; (c) increased formalization, rigidity, resistance to change, and conservatism; (d) increased conflict, anger, vindictiveness, and feelings of victimization; and (e) increased selfishness and voluntary turnover and deterioration in teamwork and cooperation (also see Cascio, Young, & Morris, 1997; Cole, 1993; DeWitt, 1993; McKinley, Sanchez, & Schick, 1995). A large majority of firms that downsize experience these deleterious effects, although a few do not, primarily due to the way in which downsizing is implemented (Cameron, 1994, 1998), paying special attention to the effects on relational reserves. As a result of the negative impact on relational reserves, layoffs also have negative implications for organizational performance. Most organizations experience deteriorating profitability, product and service quality, innovation, and organizational climate after downsizing (Cameron, 1998). For example, 3 years after downsizing, the market share prices of downsized companies were an average of 26% below the share prices of their competitors at the beginning of the 21st century. Among companies
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with similar growth rates, those that did not downsize consistently outperformed those that did in the 2001 recession. Moreover, almost all organizations that downsizedin the public sector or the private sectorexperienced an emergence of the dirty dozen as a result of downsizing (see Bennett, 1991; Cameron, 1998; Cascio et al., 1997; Cole, 1993; Henkoff, 1990; McKinley et al., 1995; Mishra & Mishra, 1994). The dirty dozen are 12 common deleterious outcomes associated with downsizing, such as declines in trust, networks, communication, commitment, and innovation along with increases in threat rigidity, selfishness, conflict, and goal displacement (Cameron, Kim, & Whetten, 1987). These negative performance effects of layoffs are consistent with theories of high-performance work systems, which argue that employment security is essential for achieving sustained innovation and productivity that benefit both employees and stockholders (Kochan & Osterman, 1994). These negative performance effects of layoffs are also consistent with relational theory more broadly as summarized in the previous section. When layoffs are used as a primary coping response in a crisis, such as a sharp decline in the demand for the organizations products or services, the resulting depletion of relational reserves mitigates the very resilience and recovery being sought.
THIS STUDY This study investigates the extent to which the dramatic differences in resiliency and recovery in U.S. airline companies after the tragedy of September 11 can be explained by these factorsthe preservation of relational and financial reserves and the existence of viable business models. The expected interrelationships of these factors are summarized in Figure 1.
METHOD Given the unexpected nature of the 9/11 crisis, we relied on publicly available data for our analyses. To test the impact of precrisis financial reserves and business models on post-9/11 layoffs and stock price recovery, our sample included all U.S. airlines classified as major airlines at the time of the 9/11 crisisAmerican, America West, Alaskan, American Trans Air (ATA), Delta, Continental, Northwest, Southwest, United, and US Airways. To test the precrisis portion of the model, our sample included quarterly data from 1987 through 2000 for all U.S. airlines classified as major airlines in 2000, the same 10 aforementioned airlines except that Trans World Airlines (TWA) still existed and ATA had not yet reached the status of a major airline.
Recovery From Crisis
Performance recovery was measured by comparing stock prices for individual airlines to their September 10, 2001, levels quarterly from December 10, 2001, through
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Relational Reserves
Viable Business Model
Layoff Avoidance
Financial Reserves
FIGURE 1: Conceptual Model of Organizational Resilience NOTE: Solid arrows indicate relationships that will be tested statistically. Dotted arrows indicate relationships that are expected but not tested in this article.
September 10, 2005. Recovery was measured as current stock price divided by stock price on September 10. One hundred percent would signify that an airlines stock price had recovered to exactly its precrisis level of September 10. It is important to note that we are not measuring stock prices per se; rather, we are measuring the recovery of stock prices to their pre-9/11 level in an attempt to reflect the concept of resilience or ability to bounce back from crisis.
Layoffs
Layoffs were measured using publicly available data from press announcements. As airlines announced layoffs, we recorded these data and continued to update the data as airlines adjusted their initial layoff plans in the face of further information. The numbers used in our analyses are the final decisions regarding percentage of employees laid off in each of the major U.S. airlines as of January 2002.
Financial Reserves
Financial reserves were indicated for this study in two wayslow levels of debt and high amounts of cash on handand were measured using publicly available measures of debt/equity ratios and days of cash on hand as of September 10, the day prior to the attacks. Debt is a constraint when a crisis or downturn occurs because interest payments are a fixed cost that must be paid regardless of revenues. Low debt levels thus give companies flexibility in a downturn due to lower fixed costs. Furthermore, low debt levels give a company greater flexibility to take on new debt to get through the downturn (Freear, 1980). Lower debt/equity ratios were therefore expected to reduce the extent of layoffs among airlines faced with the crisis of 9/11. Cash on hand also provides flexibility in the face of a crisis, enabling organizations to pay expenses caused by a crisis. Readily available cash at least partially compensates for the shortfall in current revenues. Cash on hand was therefore also expected to reduce the extent of layoffs. The source of data on debt/equity ratios was Yahoo Finance (http://finance.yahoo.com/q?s=yhoo) and Thomson Financial
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(http://tcprod.thomson.com/financial/financial.jsp). The source of data for days of cash on hand was Yahoo Finance and CNNfn (Isidore, 2001).
Relational Reserves
Following J. H. Gittell et al. (2004), relational reserves were measured for this study as the number of strikes and releases that occurred at a given airline based on archival data from the Airline Industrial Relations Conference. Under the Railway Labor Act, the regulatory regime for airlines, the National Mediation Board grants a release after its members determine that no progress is being made in negotiations.
The viability of airline business models was indicated for this study as total operating costs per available seat mile, the traditional measure of unit costs in this industry. The choice of unit costs is based on the emerging consensus that low unit costs are the starting point for a viable business model in the commercial airline industry today given an increasingly cost-sensitive customer and the penetration of nearly every U.S. market by low-cost competition. Unit costs per available seat mile were computed using Form 41 data.
Employee Productivity
Employee productivity is typically measured as a ratio of output to labor input. However, not all airline employees have the same outputs. Following J. H. Gittell, von Nordenflycht, and Kochan (2004), we therefore measured labor productivity separately for each employee craft, using U.S. Department of Transportation Form 41 data. For pilots, we measured flight miles per pilot. For flight attendants, we measured revenue passenger miles per flight attendant. For mechanics, we measured flight departures per mechanic. Similarly for dispatchers, we measured flight departures per dispatcher. For ground personnel, we measured number of passengers enplaned per ground employee. Our final measure of employee productivity is an index of these productivity measures weighted according to the size of each employee group. Cronbachs alpha for this index is .84.
Capital Productivity
In the airline industry, aircraft are one of the primary capital assets used in the production process. Aircraft productivity was computed as block hours per aircraft day, where block hours are the hours between pulling back from the airport gate, using Form 41 data. These are the hours that an aircraft is in a revenue-producing mode. Aircraft productivity can be strongly affected by the extent to which employees cooperate, coordinate, and exert discretionary effort in getting planes loaded and turned around quickly (J. H. Gittell, 2001; Knez & Simester, 2001), just as employees influence the productivity of capital equipment in other industries.
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Control Variables
To control for other factors besides relationships that are expected to influence productivity and unit costs in this industry, we include measures of union representation (percentage of employees who are unionized), wages (sum of wage and salary costs for all key operating personnel divided by total number of employees), flight length (miles flown per flight departure), aircraft size (seats per aircraft), and capital intensity (capital assets per employee). All of these control variables were measured using Form 41 data except for percentage union representation, which was measured using archival data from the Airline Industrial Relations Conference.
Data Analysis
To test empirically the association between pre-9/11 variables (financial reserves and business models) and the post-9/11 response (layoffs and performance recovery), we used the Spearmans rank correlation coefficienta conservative test of associations along with their significance levels or p values. To test empirically associations among pre-9/11 variables (relationships, productivity, and unit costs), we used the longitudinal data set described earlier with airline-quarter as the unit of analysis. We used random effects regressions, treating each airline as the random effect to allow our coefficients to reflect variation both within and across airlines over time (Hausman, 1978). FINDINGS Significant differences occurred in the strategies implemented by these 10 major airlines after the attacks of 9/11, as suggested by the percentage of employees laid off (see Figure 2). Stock price recovery since September 11 has been slow in all the major airline companies, even since the immediate crisis had passed. This was in part due to ongoing security concerns and the increased hassle factor, both of which contributed to the decline in demand for air travel (Sharkey, 2004). However, the recovery in stock prices varied substantially across the industry (see Figure 3). In particular, performance recovery since September 11 has been fastest for Southwest Airlines, whose stock price were at 92% of its pre-9/11 level over the 4 years post-9/11, and slowest for United Airlines and US Airways, whose stock prices remained at 12% and 23%, respectively, of their pre-9/11 levels over the same period. Using Spearmans rank order correlations, it is clear that the subsequent recovery in airline stock prices relative to their precrisis levels was significantly and negatively related to the extent of layoffs at the time of the crisis (see Table 1). Resilience as indicated by the speed of stock price recovery is negatively correlated with the extent of layoffs for 3 years following the crisis. At the start of the 3rd year, the correlation became statistically insignificant following the exit of US Airways from bankruptcy and the hope by investors that layoffs and bankruptcy together could lead the airlines to a successful recovery. But by the end of the 3rd year, the correlation again returned to significance. Averaged over the entire 4-year period, recovery of
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25% 20% 15% 10% 5%
Alaska
America West
Continental
United USAirways
Southwest
American
Northwest
FIGURE 2: Employee Layoffs After September 11 SOURCE: Layoffs reported in press after September 11, divided by year-end employment for 2000 as reported by Bureau of Transportation Statistics. NOTE: ATA = American Trans Air.
Alaska
Continental
Southwest
America West
Northwest
American
FIGURE 3: Average Stock Price Recovery From December 10, 2001, to September 10, 2005, to September 10, 2001, Levels SOURCE: Yahoo Finance (http://finance.yahoo.com/q?s=yhoo). NOTE: Percentage change in stock price relative to September 10, 2001, levels measured quarterly from December 10, 2001, to September 10, 2005. ATA = American Trans Air.
the major carriers to the stock price levels of pre-9/11 is strongly correlated with the percentage of layoffs they made following 9/11 (r = .788, p = .007). Figures 4 and 5 report cash on hand and debt equity ratios of the major U.S. airlines prior to September 11. The figures show substantial variation in cash and debt levels among the major airlines prior to September 11. As noted earlier, debt acts as a
United
Delta
ATA
100 90 80 70 60 50 40 30 20 10 0
USAir
Delta
ATA
0%
310 TABLE 1
Percentage Layoffs and Stock Price Recovery

Year 2 March 10, 2003 rs p rs p rs p rs p rs p rs p rs June 10, 2003 September 10, 2003 December 10, 2003 March 10, 2004 June September 10, 2004 10, 2004 p Year 3 December 10, 2004 rs p Year 4 March 10, 2005 rs p June 10, 2005 rs p September 10, 2005 rs p .825 .003
Year 1
December 10, 2001 p
March 10, 2002
June 10, 2002
September December 10, 2002 10, 2002
rs
rs
rs
rs
rs
Percentage .665 .036 .751 .012 .763 .010 .874 .000 .849 .002 .788 .007 .825 .003 .394 .260 .364 .301 .492 .148 .566 .088 .652 .041 .591 .072 .751 .012 .763 .010 layoffs
SOURCE: News reports and Yahoo Finance (http://finance.yahoo.com/q?s=yhoo). NOTE: Spearmans rank correlation of layoffs conducted postSeptember 11 as a percentage of employment against stock price recovery relative to September 10 levels. Sample = 10 major U.S. airlines. The correlation between percentage layoffs and average stock price recovery over the entire 4-year period was .788 (p = .007).
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Southwest
Northwest
Continental
Ameica West
Alaska
Delta
American
ATA
FIGURE 4: Days of Cash on Hand Preceding September 11 SOURCE: Isidore (2001) and SEC filings. NOTE: Estimates are based on June 30, 2001, cash positions and daily cash operating expenses of each major airline. ATA = American Trans Air.
constraint in a downturn because interest payments are a fixed cost that must be paid regardless of revenues (Freear, 1980). Low debt levels were thus expected to give companies flexibility in a downturn due to lower fixed costs. Furthermore, low debt levels provide companies with greater flexibility to take on new debt to survive the downturn. Cash on hand also provides flexibility in the face of a downturn in revenues, enabling organizations to pay expenses from past revenues to at least partially compensate for the shortfall in current revenues. However, cash on hand does not last long with extremely high debt levels. A Spearmans rank correlation analysis of these data shows that prior cash levels of the airlines did not predict the extent of layoffs in the 10 firms in the airline industry (r = .457, p = .184), but their debt/equity ratios were strongly predictive (r = .819, p = .004). The observed correlation between cash on hand and layoffs is relatively weak because for those companies with extremely high debt levels, like US Airways and Northwest, high levels of cash on hand could not reduce the need for layoffs. In addition to the role of financial reserves in enabling airlines to forgo layoffs and recover more quickly, we need to also explore the viability of the business models themselves prior to the crisis of 9/11. Due to the increasing threat and success of low-cost competition in the industry, there was a consensus just prior to 9/11 that one critical element of a viable business model in this industry was the achievement of low unit costs. As we see from Figure 6, there was significant variation in unit costs in this industry prior to 9/11, ranging from 7.5 cents per seat mile at Southwest Airlines to over 15 cents per seat mile at US Airways, with most carriers having unit costs around 9 to 10 cents per seat mile. A Spearmans rank correlation between unit costs and layoffs shows that unit costs prior to 9/11 were predictive of the extent of layoffs after 9/11 (r = .702, p = .024). Low unit costs might be expected to enable lower levels of debt given that debt levels are driven in part by the failure to achieve
United
USAir
100 90 80 70 60 50 40 30 20 10 0
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12
10
0 Southwest America West Alaska American Delta United ATA Continental Northwest
FIGURE 5: Debt to Equity Ratios Preceding September 11 SOURCE: Yahoo Finance (http://finance.yahoo.com/q?s=yhoo) and Thomson Financial (http://tcprod .thomson.com/financial/financial.jsp). NOTE: US Airways was off the chart with a debt/equity ratio of 300. ATA = American Trans Air.
competitive business models and the resulting lack of profits. However, firms with low unit costs might choose nevertheless to accumulate relatively high levels of debt, as seen in the case of ATA, and therefore to engage in higher levels of layoffs than we would otherwise expect. This suggests that low unit costs and low debt levels each play a distinct role in enabling companies to avoid layoffs and recover more quickly from crises. Still, lower unit costs predicted lower levels of debt (r = .612, p = .060), and even more so if we consider the impact of unit costs over the previous year on debt levels at the time of crisis (r = .733, p = .016). But whereas a viable business model can be expected to play an important role in avoiding layoffs in the face of crisis, it is not the starting point for this story. Rather, a viable business model is enabled by the development and maintenance of relational reserves over time. We conducted a longitudinal analysis of airline industry data for the 15 years prior to 9/11, considering multiple drivers of unit costs, including relational reserves, the extent of unionization, wage levels, and productivity of both aircraft and employees. Following the lead of other studies of airline operating performance, we controlled for flight length and aircraft size due to their known effects on creating economies of scale (e.g., J. H. Gittell et al., 2004). Table 2 shows the descriptive data for this model. The regression equations shown in Table 3 show that conflictual relationships predict
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16
14
12
10
0 Southwest ATA America West Delta Alaska Northwest American United Continental US Airways
FIGURE 6: Unit Costs Preceding September 11 SOURCE: Form 41, U.S. Department of Transportation. NOTE: Total operating costs (cents) per available seat mile. ATA = American Trans Air.
significant decreases in both aircraft and labor productivity (r = .519, p =.000 for aircraft productivity and r = .179, p = .001 for labor productivity). Productivity in turn predicts significant decreases in unit costs (r = .054, p = .000 for aircraft productivity and r = .105, p = .000 for labor productivity). These results support our conceptual model of organizational resilience. The development of relational reserves enables organizations to establish viable business models, therefore enabling them to build up their financial reserves over time and minimize layoffs in times of crisis, relative to organizations with weaker relational and financial reserves.
US AIRWAYS VERSUS SOUTHWEST: A QUALITATIVE COMPARISON In this section, we illustrate the conceptual model that we developed and tested earlier by focusing on the contrast between Southwest and US Airways given their
314 TABLE 2 Employee Aircraft Unit Costs Productivity Productivity Wages M SD M .440 .000 .580 .000 .042 .350 .522 .000 .124 .005 .105 .019 .164 .000 .018 .691 .270 .133 .102 .253 .079 .078 .050 .262 SD M SD M SD M SD M SD Union Conflict Representation Leg Length M SD Aircraft Size M SD .000 .254 .000 .471 .000 .063 .162 .077 .091 .003 .245 .000 .132 .002 .045 .312 .152 .001 .054 .237 .023 .052 .250 .099 .026 .035 .433 .365 .000 .019 .668 .666 .000 .000 .062 .169 .192 .000 .067 .133 .345 .000 .204 .000 .405 .000 .342 .000
Descriptive Data for Model of Conflictual Relationships, Productivity, and Unit Costs
SD
Observations
500 495
500
500
Unit Costs 9.0 1.6 Employee .055 .656 productivity Aircraft 9.9 .90 productivity Conflictual .036 .197 relationships Union .575 .265 representation Wages 56,206 13,446 Leg length 682 157 Aircraft size 121 14 Capital intensity 186,630 69,519
500
489 500 500 500
Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11 TABLE 3
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Impact of Conflictual Relationships on Productivity and Unit Costs

Employee Productivity Conflictual relationships Employee productivity Aircraft productivity Percentage union representation Wages Flight length (000) Aircraft Size (00) Capital intensity (000,000) Chi square Probability > chi square Observations .179** .262 2.47*** .388 2.44*** .754* 980.64 .000 485 Aircraft Productivity .519*** 1.18*** .364 1.9*** 2.33*** .543*** 405.42 .0000 489 Unit Costs .061*** .155* .337*** .361*** .602*** .296** 580.08 .0000 489 Unit Costs .027 .105*** .054*** .116*** .744*** .199*** .301*** .318*** 1543.70 .0000 489
NOTE: Random effect regressions with quarterly data and with airline (n = 10) as the random effect. Regression coefficients are shown. Each model includes quarterly dummies to capture changes in the industry environment. The first three columns show that conflictual relationships are associated with reduced labor productivity, reduced aircraft productivity, and increased unit costs. The last column shows that the association between conflictual relationships and unit costs is mediated by labor and aircraft productivity. *p < .05. **p < .01. ***p < .001.
similarity along several key dimensions and their stark differences along other dimensions. Due to their focus on short-haul flights (Southwests average flight length pre-9/11 was 481 miles and US Airwayss was 576 miles, relative to an average of 781 miles for the major airlines), both airlines were more vulnerable than their competitors to the hassle factor introduced by new airport security measures. The hassle factor is expected to affect disproportionately the recovery of short-haul travel because airport check-in procedures represent a higher percentage of total travel time for shorthaul travel and because short-haul travel is more easily replaced by alternative forms of transportation such as trains, buses, and automobiles. In addition to anecdotal evidence (e.g., Sharkey, 2004), data from the Federal Aviation Administration show that between December 2000 and December 2003, the number of short-haul flights droppednamely, the number of flights shorter than 249 miles decreased by 20%, and flights between 250 and 499 miles dropped by 11%. Meanwhile, the number of long-haul flights increasednamely, the number of flights between 500 and 999 miles increased by 8%, and flights of 1,000 miles or more increased by 1%. In addition, international routes proved to be more profitable than domestic routes during the postSeptember 11 period due to less intense price competition. It might be expected therefore that airlines such as Southwest and US Airways that focused on short-haul, primarily domestic markets would experience the largest deterioration in demand and revenue in the period following the terrorist attacks and would therefore have the hardest time recovering from the crisis of September 11. Moreover, Southwest and US Airways shared in common higher than average levels of unionization for the industry, with Southwest 89% unionized and US Airways
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82% unionized pre-9/11, relative to an average of 69% for the major airlines as a whole. Unionization might be expected to slow recovery given the need to renegotiate contracts with ones unionized employees or find legal grounds for abrogating those contracts. The fact that Southwest recovered more quickly than any other major airline while US Airways experienced one of the slowest recoveries suggests a need to look at other factors driving recovery. We focus here on the factors that our previous analyses have shown to be important for driving recovery as they pertain to Southwest and US Airwaysin particular, layoffs, the existence of financial and relational reserves, and the unit costs underlying their business models.
Layoffs as a Response to Crisis
US Airwayss leaders conducted the highest level of layoffs in the industry, a 24% reduction compared to the industry average of 16%. This strategy was not surprising given the history of the leadership at US Airways. When he became CEO in 1996, Stephen Wolf selected Rakesh Gangwal from United Airlines as president and began grooming him as his handpicked successor (G. C. Meyer & Meyer, 2000). Wolf had a consistent and financially lucrative approach to managing airlines, though his approach did not appear to produce sustainable performance over time. As CEO of struggling Republic Airlines, Wolf threatened bankruptcy unless his pilots took a hefty pay cut. When they did, he restored it to profitability, then sold it to Northwest. He next took on Flying Tiger, a California-based cargo carrier on the verge of collapse, squeezing out labor concessions worth $50 million before selling the company to Federal Express. At United Airlines, he extracted $4.9 billion in wage and benefit concessions before the airline became employee owned, but labor demanded his departure as a condition of the buyout agreement. In 2000 the Denver Post (Histories of United, Stephen Wolf Intertwined, 2000) described the consequences of Wolfs strategy at United. At the same time United had achieved profitability under his leadership,
There were no fond farewells from union leaders [at United] who had to negotiate contracts during the Wolf era. They hated him, said Darryl Jenkins, an aviation professor at George Washington University. This is a person who everybody has an opinion on, and the opinions are always strong. He managed through intimidation and fear, said Ira Levy, a United employee and general chairman of the International Association of Machinists District Lodge 141 in Denver. I think theres still a lot of animosity toward him. (p. 1G)
Wolfs selection and tutelage of Gangwal at US Airways was predictably a perpetuation of the same strategic approach. Their expertise at tightening operations and extracting labor concessions was well known, so when they took the reins at US Airways, unions knew what to expect. Some people respected Wolf for having made United a champ. Most, however, were apprehensive. They knew Wolfs track record and they expected him to come after concessions with pliers in hand (G. C. Meyer & Meyer, 2000, p. 247).
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Gangwal became CEO in 1998, and when the tragedy of September 11 occurred, it is not surprising in retrospect that his leadership approach appeared to take advantage of the situation to accomplish goals he had not previously been able to accomplish:
Despite US Airways huge losses, President Rakesh Gangwal said he is optimistic about the airlines future. Specifically, he said the September 11 attacks have allowed the airline to restructure and downsize in ways that would have been impossible otherwise. Specifically, the attacks allow the airline to invoke force majeure clauses in union contracts and eliminate unprofitable routes. Force majeure is the legal term for an uncontrollable event that releases a party from its contractual obligations. Gangwal said he expects the changes to be permanent. I dont want to take advantage of the situation, but we have to do what is right for the company, Gangwal said in a conference call with analysts. And the events of September 11th have opened certain doors for the company that were pretty much closed before. (Barakat, 2001)
Employees responded negatively to this apparent opportunism and disregard for human relationships on the part of US Airwayss leadership, and their representatives filed a series of grievances against the airline related to its use of the force majeure clause. The head of the pilots union noted, Weve been saying all along that management has been using force majeure not as an opportunity to get through a crisis, but to take advantage of a crisis (Barakat, 2001). Whether the actions taken by US Airways were legal or not, they are expected, based on our model, to do lasting damage to relational reserves and to undermine the credibility of its leadership. Indeed, US Airwayss leadership was replaced in early 2002 due in part to its loss of credibility with employees as a result of its response to the crisis of September 11. The case of Southwest illustrates a different strategy for responding to the crisis. Southwest was determined to avoid layoffs altogether and couched its decision in terms of taking care of our people. Traditional wisdom suggests that avoiding layoffs in the face of a dramatic decline in demand would jeopardize Southwests shortterm well-being. That is, investing in relationships by avoiding layoffs would put short-term survival at risk, as was articulated by the senior executives of US Airways. Indeed, Southwest was reportedly losing millions of dollars per day (Trottman, 2001a) in the weeks following the terrorist attacks. Clearly Southwest could not afford to suffer losses of that magnitude indefinitely. Still, according to Southwests CEO Jim Parker, We are willing to suffer some damage, even to our stock price, to protect the jobs of our people (Conlin, 2001, p. 42). Southwest indicated a willingness to suffer these immediate losses in order to protect relational reserves and maintain longer term performance. The result was that while other airlines shed both employees and unprofitable routes, Southwest maintained a steady presence in the wake of the attacks, refusing to lay off any of its employees. Instead, Southwest treated the crisis as an opportunity to increase its presence and expand the availability of its service to the flying public. According to an aviation consultant, Theyre doing what they do best, which is to shine in the hours of trouble (Trottman, 2001b, p. A1). Southwest used the crisis as an opportunity to strengthen rather than weaken employee relationships. Southwest had the most consistently positive employee relations
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of any airline in the industry while at the same time being the most highly unionized of all the airlines (J. H. Gittell et al., 2004). As Southwest grew from an upstart to a major carrier, it continued to reach contractual agreements with its unions more quickly than any other airline (von Nordenflycht, & Kochan, 2003). Just prior to 9/11 however, Southwest was embroiled in difficult labor negotiations. Southwests no-layoff response to September 11 had the effect of reminding its employees of Southwests tradition of caring. According to the president of the Transport Workers Union local representing Southwests ramp and operations employees, What may have seemed like really big issues a month ago maybe arent quite the big issues now. . . . When it gets bad everywhere else, its good here (Trottman, 2001b, p. A1). Asked about Southwests efforts to avoid layoffs in the wake of the September 11 attacks, a Southwest employee in the Office of Financial Analysis explained, Its part of our culture. Weve always said well do whatever we can to take care of our people. So thats what weve tried to do (J. H. Gittell, 2003, p. 242). Former Southwest CEO Herb Kelleher explained his philosophy regarding layoffs in early 2001, before the crisis of September 11 hit:
Nothing kills your companys culture like layoffs. Nobody has ever been furloughed [at Southwest], and that is unprecedented in the airline industry. Its been a huge strength of ours. . . . We could have furloughed at various times and been more profitable, but I always thought that was short-sighted. You want to show your people that you value them and youre not going to hurt them just to get a little more money in the short term. Not furloughing people breeds loyalty. It breeds a sense of security. It breeds a sense of trust. So in bad times you take care of them, and in good times theyre thinking, perhaps, Weve never lost our jobs. Thats a pretty good reason to stick around. (Brooker, 2001, p. 62)
Whereas the views expressed by Southwests leaders are consistent with the critical role of relational reserves in fostering organizational resilience, they contradict the prevailing prescriptions for competitive corporate strategy. Referring to Southwest CEO Jim Parkers comment about his willingness to take a hit on Southwests stock price if necessary to protect the jobs of its people, Business Week noted,
Such words would likely make famous job-slashers like Jack Welch and Al Dunlap cringe. But Southwest is a member of a tiny fraternity of contrarian companies that refuse, at least for now, to lay off. . . . In the aftermath of a national tragedy that economists say makes a recession and thousands of additional job cuts inevitable, their stances seem almost noble, an old-fashioned antidote to the make-the-numbers-or-else ethos pervading Corporate America. (Conlin, 2001, p. 42)
The prevailing prescriptions for competitive corporate strategy advocate layoffs to protect the interests of the shareholders (Tichy, 1993). This view is consistent with a longstanding stream of thought by U.S. economists regarding the dominance of shareholder rights over those of other stakeholders (Friedman, 1970; Jensen, 1989). Consistent with this view, the relationship between organizations and their employees is often treated as a contingent one. However, as argued by theories of highperformance work systems, job security is essential for sustained innovation and productivity due to the high levels of trust and commitment such an approach tends
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to engender (e.g., Kochan & Osterman, 1994). Indeed, Cappelli (1999) observed that employers who moved toward a more contingent approach to employment were shocked by the collapse of employee morale and often ended up backpedaling to regain the employee commitment without which it was difficult to operate. As even Business Week pointed out, there are practical benefits of a no-layoff approach in the face of crisis, namely fierce loyalty, higher productivity, and the innovation needed to enable them to snap back once the economy recovers (Conlin, 2001, p. 42). These arguments are consistent with the negative association between layoffs and stock price recovery discussed earlier.
The Role of Financial Reserves
According to our model and supported by our quantitative analyses, it is not sufficient to want to avoid layoffs. One must be able to sustain a downturn without resorting to layoffs, and financial reserves are one critical factor that enables companies to do so. Avoiding personnel reductions requires that an organization be financially able to sustain short-term losses. In particular, two factorscash on hand and debt loadare important contributors to resilience, or the extent to which a firm can withstand financial crisis. Cash on hand is crucial for coping with the immediate-term resource demands that arise in a crisis, and a low debt/equity ratio is necessary for coping with the medium- and long-term exigencies of a crisis. Avoiding employee layoffs altogether or maintaining a contractual commitment to severance pay for those who are laid off is highly related to the extent to which the organization has the financial reserves with which to operate. Retaining cash to cover immediate financial pressures and maintaining low debt levels, thereby allowing the firm to finance longer-term expenses, are key elements in preserving relational reserves in a firm. Organizations without sufficient financial reserves may be forced to break their commitments with employees and customers when faced with crisis simply because they cannot meet payroll. On the other hand, relational reserves can be significantly enhanced in the presence of financial slack. Southwests ability to resist layoffs can be attributed to its long-standing policy of maintaining low debt levels and an abundant supply of cash on hand. As people throughout the company have pointed out repeatedly over the years, At Southwest, we manage in good times as though we were in bad times (J. H. Gittell, 2003, p. 244). Maintaining high levels of financial reserves had not been common business practice in the airline industry however. For years, Southwest has been the only singleA-rated airline company. Prior to September 11, Kelleher explained Southwests financial policy and how it enabled Southwest to thrive during past downturns:
Most people think of us as this flamboyant airline, but were really very conservative from the fiscal standpoint. We have the best balance sheet in the industry. Weve always made sure that we never overreached ourselves. We never got dangerously in debt, and never let costs get out of hand. And that gave us a real edge during [the Gulf War crisis of 1990 to 1994]. (Brooker, 2001, p. 62)
Over time, Southwest Airlines made a conscious, strategic choice to maintain substantially greater reserves than was the norm in its industry. Southwest protected these reserves by sticking to its policy of gradual steady growth despite the fact that there
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was sufficient demand for Southwests service to permit a far faster rate of growth. According to John Denison, Southwests executive vice president of corporate services,
We promise the marketplace 10 percent growth, but we are only going to grow as fast as we can manage. Sometimes we have grown faster strategically. We acquired Morris Air in 1994 at the right time to compete. But we try to maintain the balance sheet. It is no accident that we are the only single-A-rated company in the industry. (J. H. Gittell, 2003, p. 245)
US Airways, like other U.S. airlines, had taken on high levels of debt over the years, responding to pressures from Wall Street. At the time of the 9/11 attacks for example, the airline had incurred almost $8 billion in debt obligations and had lost money for eight straight quarters. Wall Street analysts complained publicly about the high costs of labor contracts at US Airways, and the airlines strategy for coping with these financial pressures had been to borrow more money from sources such as J.P. Morgan Chase ($71 million), Wilmington Trust ($50 million), and EDS ($47 million; CNN Money, 2002). High debt levels coupled with high labor costs led to severely restricted financial flexibility when the 9/11 crisis occurred. These results suggest that it is not merely the desire to invest in relational reserves by avoiding layoffs that accounts for resilience in the face of crisis. Wanting to avoid layoffs to preserve relationships is different than being able to do it. It is both the desire and ability to avoid damaging relational reserves that account for long-term resilience. Financial reserves, particularly in the form of low debt levels, serve as a supplementary coping resource for organizations by giving them room to maneuver in the face of crisis. Organizations can avoid relying on layoffs as the primary response to crisis if they have the necessary financial reserves. These results are expected to be relevant beyond the airline industry as well. Indeed, financial theory indicates that interest payments create a form of financial risk that becomes greater when interest payments are higher and when there is variability of operating earnings (Freear, 1980). By implication, financial reserves play a more important role in fostering organizational resilience when the variability of operating earnings in the industry is greater. If the lack of financial reserves makes an organization vulnerable to crisis and more dependent on using layoffs as a coping strategyand therefore less resilient why then are high levels of debt a common feature of so many companies? One answer is illustrated by the fact that Southwest has been criticized by Wall Street analysts for its policy of maintaining high levels of financial reserves. The business press reported that Southwests
conservative approach has been criticized by Wall Street analysts, who have argued that the airline should use its extra cash to make acquisitions or buy back stock. Goldman Sachs airline analyst, Glenn Engel, called the balance sheet too strong [although] Engel allowed, this has meant that when times are tough, they have a lot more flexibility. (Mount, 2002, p. 29)
The Role of a Viable Business Model and of Relationships for Achieving It
As suggested by our model and supported by our quantitative analyses, another reason that Southwest could avoid layoffs in the face of September 11 was its low
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operating costs. Low operating costs had become the sine qua non for a viable business model in the airline industry over the course of the 1990s. Consumer behavior shifted in the early 1990s toward greater price sensitivity, with consumers demanding lower costs and comparing airline travel more carefully with other modes of transportation and communication. After a low point in the early 1990s, passenger willingness to pay rebounded somewhat after 1994. But from 2000 to 2001 (prior to 9/11), revenue per passenger mile dropped by more than 10%. The Wall Street Journal featured two prominent articles reflecting the growing consensus that these changes in customer willingness to pay, as in the case of the retail industry, reflected the new reality for the airline industry (Brannigan, Carey, & McCartney, 2001; Trottman & McCartney, 2002).
Anyone who has a modicum of Internet capability and wants to take what is now a modest amount of time can very rapidly find out and comparison shop, said Leo Mullin, CEO of Delta Airlines. There is almost perfect information out there. (Brannigan et al., 2001, p. A1)
Whereas most major airlines had unit operating costs in the range of 9 to 11 cents per available seat mile prior to 9/11, Southwests were just 7.7 cents per seat mile. According to Merrill Lynch analyst Michael Linenberg, They tend to have some of the lowest costs in the industry, so in times of depressed business, they can make money while others are losing money (Southwest to Add 4,000 Jobs This Year, 2002). US Airways by contrast faced the crisis of September 11 with the highest operating costs of any major airline in the U.S. industry, at 15.4 cents per seat mile. The key to low unit costs in this industry is productivity of the airlines most costly assetsemployees and aircraft. Southwests strategy for achieving low costs focused over the years on increasing productivity rather than lowering wages and benefits. In his 1995 Message to the Field, CEO Herb Kelleher said, We want to reduce all of our costs, except our wages and benefits and profit-sharing. This is Southwests way of competing, unlike others who lower their wages and benefits (J. H. Gittell, 2003, p. 11). Southwest achieved the highest levels of productivity for both employees and aircraft based on its legendary levels of teamwork and relational coordination, enabling employees to turn aircraft quickly at the gate, thus maximizing the time that aircraft are in the air, earning revenue. The role of positive working relationships for achieving these outcomes is supported by the analyses conducted earlier but was also established in a study that compared Southwest in a more detailed way to some of its major competitors (J. H. Gittell, 2003). This study showed that relationships of shared goals, shared knowledge, and mutual respect support high levels of coordination among employees and explain much of the variation in employee and aircraft productivity between Southwest and its competitors. Starting in the 1990s, US Airways also made concerted efforts to achieve low unit costs. In the case of US Airways, however, there were two distinct strategies improving productivity and reducing wages and benefits. After losing most of the intra-California market to Southwest in 1992, US Airways endured a strike with its mechanics, resulting in lower wages than several of its key competitors, including Southwest. After Southwests invasion of its Baltimore hub in 1993, US Airways
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tried a second strategy for reducing unit costssetting up its own quick turnaround operation under the name Project High Ground in 1994. Project High Ground was designed to speed the way [USAir] services and turns around planes at airports. Borrowing a page from Southwest, USAir is trying to halve the time its planes spend on the ground (McCarthy & OBrian, 1994). According to US Airwayss Boston station manager, On our regular flights, we get 40 to 45 minutes to turn the plane around. Under High Ground, we do it in 20 to 25 minutes for some and 30 to 35 minutes for others, depending on the routing (J. H. Gittell, 1995, p. 79). US Airways announced in spring 1994 that it would expand its new business model from 22 to 100 aircraft. But some industry observers expected US Airways to fail unless pay and benefits were cut further (McCarthy & OBrian, 1994). Strong pressures from investors for pay cuts and strong stands from union leaders against them put top management in a difficult position. Moodys lowered US Airwayss bond ratings, citing concern that the companys recent operating changes designed to reduce its cost structure will not be sufficient to offset the anticipated revenue losses from price competition (Feldman, 1994, p. 24). The pilots union argued that the airlines costs were too high not because of labor but because it was not deploying its assets wisely. A June 1994 proposal to the union to save $175 million through management and staff reductions and by subcontracting mail and freight operations was met by a pilot counterproposal for an employee buyout with board representation. A year later, after stalled negotiations, the airlines fifth crash in 5 years, a perceived threat of bankruptcy, and threats by management to shrink the airline, the parties reached agreement, but the animosity and ill will continued. In 1997, still suffering from the animosity of negotiations over pay cuts, US Airways sought again to reduce unit costs by raising employee and aircraft productivity, launching a new low-cost business model called MetroJet (Carey, 1998). Two dozen volunteers were recruited who wanted to take part in a new kind of airline. The team consisted of representatives from all the major employee groups and spent 6 months designing MetroJet from the ground up. According to media reports, even the staunchest foes of management were won over by this innovative experiment in human resource management and empowerment (Carey, 1998, p. B1). At the same time however, US Airwayss leadership continued to extract pay concessions from employees. Labor strife continued throughout the rest of the 1990s, culminating in 2000 with a work action threatened by flight attendants, who were fed up after 4 years of failing to secure a contract for themselves. The bold experiment to build a new and viable business model for US Airways never fully succeeded, due in large part to poor working relationships, and was terminated by Ghangwal in the aftermath of September 11.
Summary
The contrasting stories of Southwest Airlines and US Airways illustrate the model of resilience we tested in this article. A viable business model achieved through long-term positive employee relations along with adequate financial reserves enabled
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Southwest to return quickly to business as usual following the crisis of 9/11. As early as February 2002, Southwest announced plans to hire about 4,000 new employees, drawing in part from the employees laid off from other airlines. Its ability to hire new employees was even further strengthened by the fact that it did not conduct layoffs in the downturn after 9/11. According to a press report, Ron Jackson, a former United Airlines flight attendant and electrician who joined Southwest last year, said the carriers stability was a factor. We are always made to feel comfortable that we are going to keep our jobs, said Jackson (Southwest to Add 4,000 Jobs This Year, 2002). A Merrill Lynch financial analyst speculated that Southwests ability to avoid layoffs last fall has probably raised employee loyalty and improved its productivityalready considered the strongest among major carriers (Southwest to Add 4,000 Jobs This Year, 2002). US Airways by contrast continued to rely on layoffs as a strategy of recovery. In 2002, the company announced that an additional 471 pilots would be let go, adding to a previously announced layoff of 286 pilots after September 11. Moreover, an additional 915 flight attendants were furloughed, making a total reduction of 3,675 flight attendants out of 10,000 that were employed before the September 11 tragedy (US Airways Plans to Lay Off More Pilots, 2002). According to a San Francisco Chronicle report,
It is certainly a management truism that low morale among workers inevitably results in low productivity, low quality, erosion of customer loyalty, and, ultimately, profits. US Airways employees, who have seen their pay cut by more than 20 percent and their health insurance and pension plans shrink, are certainly an unhappy lot. People are giving 110 percent, but they are totally beaten down, said Francis Smith, 53, a 24-year employee. . . . Dianne Fogarty, a US Airways flight attendant with 33 years of service, has lost pay and vacation days and said she was resentful that, in her view, management sees her as only a dollar sign. Nonetheless, she said, they will not take away my work ethic, my sense of humor, or my smile. (Low Morale Afflicts US Airways Workers: Concessions Keep Them Flying Unhappy, 2004, p. C1)
These cases illustrate how the development of relational reserves enables organizations to establish viable business models and build up financial reserves over time, thus minimizing the need for layoffs in times of crisis, and reveal that the failure to build relational reserves leads to very different results. These cases also suggest that there are different managerial strategies underlying the observed data. We add to our model of organizational resilience the strategic decision to invest (or not to invest) in relational and financial reserves (see Figure 7). CONCLUSION In the normal pattern of organizational behavior, an organizations leadership responds to financial crises with layoffs and cutbacks. The organizations performance subsequently suffers because of the resulting deterioration in relational reserves. The relational reserves that could serve as a collective coping mechanism in the face of adversity are instead weakened by layoffs. This scenario represents a dilemma for organizations in which measures taken for short-term survival appear to undermine the conditions for longer-term success.
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Relational Reserves
Layoff Avoidance
Financial Reserves
Strategic Decision to Invest in Relational and Financial Reserves
FIGURE 7: Conceptual Model of Organizational Resilience NOTE: Solid arrows indicate relationships that are shown statistically. Dotted arrows indicate relationships that are expected but not tested in this article.
However, some organizations respond differently to crisis, accepting the short-term costs of excess staffing levels to maintain positive human relationships in the face of adversity. By avoiding layoffs, these organizations maintain or even strengthen human relationships, creating coping resources that enable organizational members to respond cohesively to the crisis in innovative ways. As a result, the deterioration of organizational performance caused by the crisis is ameliorated. Furthermore, once the immediate crisis has passed, organizational performance can return more quickly to precrisis performance levels due to the maintenance of relationships during the period of the crisis. To avoid layoffs however, organizations must be financially able to do so. Financial reserves and viable business models thus play a significant role in minimizing layoffs and in sustaining the relationships that enable organizations to return more quickly to precrisis performance levels. Moreover, the achievement of a viable business model over time is itself enabled by positive working relationships, as in the case of Southwest Airlines, and prevented by their absence, as has thus far been the case for US Airways. Although viable business models play an important role in minimizing layoffs, they are enabled by the careful nurturing of relational reserves over the years. Financial reserves contribute further to the ability to minimize layoffs in the face of crisis. The results of our investigation of U.S. airline companies provide support for this model. Our findings are consistent with A. D. Meyers (1982) conclusion that financial reserves coupled with a strong commitment to employees are pivotal to an organizations ability to cope with environmental jolts. Our resilience model explains the role that relational reserves play in coping with crisis and the role that financial reserves play in enabling organizations to maintain relational reserves. Relational reserves are clearly damaged by layoffs, and numerous studies have provided evidence
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that layoffs lead to deterioration in employee relationships (Cameron, 1994, 1998; Cameron et al., 1991). The violation of the psychological contract resulting from downsizing (Rousseau, 1995) causes trust and cooperation to be replaced by distrust and antagonism, so layoffs almost always cause a deterioration in relational reserves. For these reasons, employment security has long been identified as a key component of high-performance work systems (e.g., Kochan & Osterman, 1994). Airline companies that avoided layoffs and maintained commitments to employees showed more resiliency than those that violated contractual commitments, instituted layoffs, and cancelled severance benefits. Wanting to maintain commitments in the face of crisis is only half the story. The other half is being able to do so, which requires having a viable business model and financial reserves in place for that purpose. The relationship-based performance of Southwest Airlines contradicts the leveraged buy-out movement of the 1980s and 1990s in which corporate leaders were encouraged to rid their organizations of financial reserves with the promise that this would make them efficient, lean, and more accountable to shareholders. The facts that there would be few reserves in place to preserve relationships and commitments in the face of crises and that a decline in organizational resilience were the risks are the often-neglected aspects of that phenomenon. The model developed here combines insights from the literature on highperformance work systems (e.g., Kochan & Osterman, 1994), with insights from the literature on high-reliability work organizations and relational models of resilience (e.g., Weick et al., 1999) and with insights from positive relationships in organizations (e.g., Dutton & Ragins, 2006). The literature on high-performance work systems has long argued for the role that employee commitment plays in achieving productivity and other outcomes and for the role that employment security plays in achieving employee commitment. This literature has further highlighted pressures from financial stakeholders as working to undermine employment security. The literature on high-reliability work organizations and relational models of resilience has highlighted the importance of relationships and financial reserves for achieving resilience in the face of environmental jolts. The literature on positive social relationships uncovers salutary individual and organizational effects of strong relational reserves. Our model weaves together these three distinct literatures to explain how the airline industry responded to the crisis of September 11. Moreover, this model has received considerable support from the available data. The most powerful implication of our model is that relational and financial reserves tend to be mutual reinforcing, forming a virtuous cycle that contributes to resiliency. Positive relationships tend to produce lower costs and lower debt levels over time, making it easier to sustain external shocks without breaking commitments, thus further strengthening relationships and performance. Likewise, negative relationships tend to produce high costs and high debt levels over time, making it harder to sustain external shocks without breaking commitments, thus further weakening relationships and
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performance. This vicious cycle can be replaced by a virtuous cycle of resilience when managers and other key stakeholders commit themselves to building relational and financial reserves over time.
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The Journal of Applied Behavioral Science

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Relationships, Layoffs, and Organizational Resilience

Jody Hoffer Gittell

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Viable Business Model

Recovery From Crisis

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

25% 20% 15% 10% 5%

Percentage Layoffs and Stock Price Recovery

December 10, 2001 p

March 10, 2002

June 10, 2002

September December 10, 2002 10, 2002

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Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

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489 500 500 500

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11 TABLE 3

Impact of Conflictual Relationships on Productivity and Unit Costs

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THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

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Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

Downloaded from http://jab.sagepub.com at SAGE Publications on May 19, 2009

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

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Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

The Role of a Viable Business Model and of Relationships for Achieving It

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Viable Business Model

Recovery From Crisis

Strategic Decision to Invest in Relational and Financial Reserves

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

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THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

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Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

Downloaded from http://jab.sagepub.com at SAGE Publications on May 19, 2009

THE JOURNAL OF APPLIED BEHAVIORAL SCIENCE

Downloaded from http://jab.sagepub.com at SAGE Publications on May 19, 2009

Gittell et al. / AIRLINE RESPONSES TO SEPTEMBER 11

Downloaded from http://jab.sagepub.com at SAGE Publications on May 19, 2009

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